Introduction:

In Sanjay Kumar v. SEBI, Case No. CRL.M.C. 507/2022, the Delhi High Court delivered an important judgment on the interpretation of the SEBI (Settlement Proceedings) Regulations, 2018, especially regarding the material considered by the SEBI or its High Powered Advisory Committee (HPAC) in compounding offences under the SEBI Act, 1992. Justice Subramonium Prasad ruled that the SEBI Settlement Regulations do not prohibit a court from examining the material that led the SEBI or HPAC to either approve or reject a plea for compounding of offences. This case arose from an application filed by the petitioner, Sanjay Kumar, who sought directions to SEBI to provide him with the material that the HPAC considered when it rejected his application for the compounding of alleged fraudulent transactions aimed at manipulating the stock market. The petitioner contended that he had the right to access the materials in question, while SEBI argued that the Settlement Regulations barred such disclosure, citing the confidentiality provisions.

Petitioner’s Arguments:

The petitioner, represented by a team of prominent advocates, argued that SEBI had a duty to disclose the investigative material and all relevant documents concerning the proceedings against him. He referenced the Supreme Court decision in T. Takano v. SEBI (2022), which affirmed that SEBI is required to disclose information that is relevant to the proceedings against a person as a matter of right. The petitioner emphasized that without access to these materials, he could not effectively challenge the decision of the HPAC to reject his application for compounding. The petitioner further contended that understanding the reasons behind the HPAC’s recommendation was crucial for him to build his case and assert his rights effectively. He requested the court to direct SEBI to place on record all the material considered by HPAC, arguing that this material was essential to decide the compounding application and, therefore, should not be withheld under the cloak of confidentiality.

SEBI’s Arguments:

On the other hand, SEBI, represented by senior advocate Pinky Anand, argued that the regulations under the SEBI Settlement Proceedings, particularly Regulation 29(2), prohibit the use of material presented before the HPAC or the SEBI Board as evidence in any court or tribunal. SEBI contended that this provision effectively shields the records and material presented before the HPAC from being disclosed or used in court proceedings. Furthermore, SEBI emphasized that the petitioner had already been provided with the decision of the HPAC, including the reasons for rejecting the request for compounding. Therefore, SEBI argued that there was no necessity to provide the petitioner with the underlying documents or materials. SEBI also maintained that the confidentiality of the proceedings was paramount, and it was unnecessary to disclose sensitive documents in the context of a challenge to the HPAC’s opinion.

Court’s Observations and Judgment:

After considering the arguments from both sides, Justice Subramonium Prasad observed that the SEBI (Settlement Proceedings) Regulations cannot be construed to prohibit a court from examining the material presented before the HPAC or the SEBI Board in order to understand the factors that influenced the decision on whether to compound the offence or not. The Court highlighted that while Regulation 29(2) of the Settlement Regulations prohibits the use of such material as evidence in a court of law, it does not prevent the court from looking into the materials for the purpose of reviewing the compounding decision. Justice Prasad remarked that a court’s role is to understand the reasoning behind the rejection or approval of a compounding plea to ensure that the process was fair and transparent.

The Court further stated that the petitioner’s request for the documents was not an attempt to delay the trial or proceedings. Instead, the documents were critical to determining the legitimacy of the compounding decision. The Court noted that the principles of natural justice require that the petitioner be provided with an opportunity to know the material considered by SEBI in making its decision, particularly in light of the petitioner’s right to challenge the rejection of his compounding request. Justice Prasad acknowledged the sensitive nature of some of the material, and while SEBI had raised concerns about confidentiality, he ruled that the competent court, in this case, the Sessions Court, should decide whether the material could be shared with the petitioner.

In a landmark decision, the Court directed SEBI to produce all the relevant documents before the Sessions Court in a sealed cover. The Sessions Court would then determine whether the petitioner could be granted access to these materials. This ruling was significant as it affirmed that courts could not be barred from reviewing the materials leading to decisions on compounding offences, ensuring transparency in such proceedings.

The judgment also emphasized that in matters involving regulatory authorities like SEBI, where the powers of compounding offences and the settlement of disputes are central, it is essential for the process to be scrutinized to ensure fairness. The disclosure of materials considered by SEBI was seen as a fundamental part of the due process of law, especially in cases involving allegations of fraudulent market activities that could have significant legal and financial implications for the accused.